Working Papers No. 107/08
‘The Big Problem of the Petty Coins’,
and how it could be solved in the
late Middle Ages
Oliver Volckart
© Oliver Volckart
London School of Economics
February 2008
Department of Economic History
London School of Economics
Houghton Street
London, WC2A 2AE
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‘The Big Problem of the Petty Coins’, and how it could be solved in
the late Middle Ages
Oliver Volckart
Abstract
In this paper, the problem of why low-purchasing power silver coins depreciated
relative to high-purchasing power gold coins is examined. The standard
explanation by Sargent and Velde is refuted. It is argued that the relative stability of
gold was due to the demand from consumers able to detect debasements and to
choose other suppliers; the rulers’ fear of a loss of reputation therefore allowed
them to commit to monetary stability. Consumers of silver were less able to detect
changes in the standard and therefore willing to accept debased coins, which
meant that rulers could not easily commit to preserving stable silver currencies.
The problem could be solved by establishing an independent agency responsible
for monetary policies. As infringements of these agencies’ autonomy would be
obvious to a wider audience, rulers could then commit to respecting monetary
stability. Data on the standards of urban and princely currencies supports the
conclusion that this mechanism solved the problem of maintaining the stability of
low-purchasing power silver coins.
1.
Introduction
To the modern eye, late medieval monetary systems exhibit a
number of baffling complexities: They were usually based on some
variant of a duodecimal system; they contained ‘ghost units’ that never
circulated as coins but were solely used for accounting purposes; the
numerical relations between denominations of the same currency were
not necessarily stable; and they suffered frequent changes in the bullion
content of the coins from which they were composed. In 1953, Carlo
Maria Cipolla (1956) gave a series of classic lectures at the University of
Cincinnati where he addressed some of these problems. One of his
lectures, called ‘the big problem of the petty coins’, became particularly
famous. There, Cipolla asked why the bullion content of coins with a high
purchasing power seems to have been more stable than that of coins
1
whose purchasing power was low, why, in other words, authorities in the
late Middle Ages failed to develop a system of fractional money where the
smaller denominations were token coins issued in limited quantities, with
only the larger units having a material value that approached their face
value. While eschewing a systematic answer to his question, Cipolla
provided a wealth of detail and discussed at length the motives and aims
of political actors and social groups involved in monetary policies.
Taking up Cipolla’s subject, subsequent research has variously
claimed that smaller coins were occasionally supplied in quantities that
drove the larger denominations, whose bullion content was proportionally
higher, out of circulation (van der Wee, 1969, p. 375), or that there was
an undersupply that left the public short of small change (Grierson, 1976,
p. 113). John H. Munro (1988, p. 414) used fourteenth- and fifteenthcentury mint accounts from Flanders in combination with data on the
development of commodity prices to determine whether supply matched
demand, concluding that the case for a chronic scarcity of petty coins had
not been proven. More recently, Thomas J. Sargent and François R.
Velde (1999; 2002) redirected the focus of research to the question of the
relative stability of high- and low-purchasing power denominations. They
adapted Cipolla’s title, changing it in the process to the racier ‘big problem
of small change’, and provided an in-depth analysis based on a model
that they applied to a number of episodes from the monetary history of
several European countries. While this is not the place to review the
model in any detail or to do justice to its elegance, it is possible briefly to
summarize the core of the argument. The starting point is the idea that
traditional theories of commodity money are faulty because they assign
the same function to all denominations within one currency. Sargent and
Velde (2002, p. 9), by contrast, distinguish among denominations and
claim that smaller ones play a special role large coins cannot fulfil:
‘[S]mall denomination coins can be used to purchase expensive items,
2
but large denomination coins cannot be used to buy cheap items’. In their
model, this so-called ‘penny-in-advance constraint’ causes a fall in the
exchange rate of small coins relative to large ones: large denominations
provide their owners with an extra return that compensates them for their
lack of liquidity. Small change therefore becomes at the same time
relatively scarce and cheaper. Such price signals, in turn,
‘perversely hasten the day when small coins will eventually be
melted. Since they depreciate as currency, they ultimately become
more valuable as metal than as coins, unless the government
makes appropriate adjustments in the parameters governing the
melting points for small coins. This feature of the model explains
the widely observed persistent depreciation of small coins, inspires
our interpretation of debasements of small coins as a cure for
shortages of small change within the medieval money supply
mechanism, and suggests how that mechanism needed to be
reformed’ (Sargent and Velde, 2002, p. 10).
Put briefly, small coins are more useful than larger ones, hence
demand for them is relatively stronger, hence they tend to be relatively
scarce; and in order to be able to increase their quantity, governments
reduce their content of bullion more rapidly than that of larger
denominations.
Sargent and Velde’s model has been widely acclaimed for the
analytical rigour that went into its construction (e.g. Yeager, 2003; Rolnick
and Weber, 2003; Redish, 2003). However, with few exceptions (cf. the
review by Schnabel, 2005) economic historians seem so far to have paid
little heed to it. It is of course futile to speculate about why this should be
the case. What is hopefully not futile is drawing attention to some flaws in
Sargent and Velde’s argument, pointing out that there is much counterevidence which their model leaves unexplained, and offering an
alternative solution that at least with regard to the period discussed here –
that is, to the fourteenth to sixteenth centuries – fits the historical record
3
better. The whole issue is important because in order to be able to
compare prices from different localities – which is essential for e.g.
integration studies, analysis of income development etc. – we need
information on the bullion content of the several denominations which late
medieval currencies consisted of. Apart from that, the shortage or
abundance of specific denominations influenced other data, for example
rates of interest, which we can not even begin to study in a meaningful
way without understanding the underlying causes.
The rest of the paper is organised as follows: In the next section
(2.1.), some flaws in Sargent and Velde’s argument are discussed. Here,
counter-evidence is also presented. In section 2.2., an alternative
explanation is suggested. This is based on the idea that the issue of why
smaller denominations were debased more quickly than large ones is due
to the costs which consumers faced when they checked that the money
had its expected content of bullion, and of the varying ability of the
suppliers of coinage to credibly commit to stable and predictable
monetary policies. The question of how these problems could be (and
occasionally were) solved is discussed in the subsequent section (2.3.). A
final section (3.) summarises the argument and the main findings of the
study.
2.
The Problem, its Causes, and how it Could be Solved
2.1. Small Change and Large Coins: the Dynamics of Late
Medieval Minting
Before taking a closer look at Sargent and Velde’s argument, it is
useful briefly to check whether or how far the phenomenon they set out to
explain – the ‘persistent depreciation in the silver content of small coins’
(Sargent and Velde, 2002, p. 15) – actually existed. The authors suggest
that it did exist by providing a graph which charts the number of small
4
coins produced from a given weight of silver in six countries (Sargent and
Velde, 2002, p. 16). The data shows that these numbers grew
considerably over time, indicating that the quantity of silver contained in
each individual coin fell to a sometimes spectacularly low level. There is
of course no dispute that many medieval and early modern currencies
experienced frequent debasements. However, debasements as such are
not the issue. The issue is rather whether small coins depreciated relative
to large ones (cf. Sargent and Velde, 2002, p. 5), and this is less easy to
show. There are two reasons for this. First, there is a lack of evidence: In
many cases, we have no reliable information about the standard of the
smaller coinage, even when we are well informed about that of the larger
denominations. Second, there were currencies where the numerical
relationship between smaller and larger coins was unstable. If we want to
compare rates of debasement, we need a common denominator such as
the silver equivalent of the units of account (the ‘ghost’ units that were
sums of actual coins and were used for accounting purposes). Thus, even
when we know how much silver the several types of coins contained, we
cannot use this information if we do not know how they related to each
other and to the unit of account of the currency in question. Still, we do
have sufficient information to take a sample of ten late medieval
currencies. The result is given in the following graph, which plots the
silver equivalents of the units of account based on the smallest
denominations of these currencies as a percentage of this silver
equivalent based on the largest coins (for example, the silver equivalent
of the pound sterling, calculated as the sum of 960 farthings or ¼-pennypieces as percentage of the silver equivalent of the pound calculated as
the sum of 60 groats or 4-penny-pieces). To provide the necessary
background information, the graph also charts the debasements which
the largest denominations of the currencies suffered.
5
Fig. 1: Silver Equivalents of the Units of Account Based on the Bullion Content of the Largest
Denominations (left); Silver Equivalent of the Units of Account in the Smallest Denominations
as percent of the Silver Equivalent in the Largest Denominations (right)
Proportional silver content of small change
Debasements of largest denominations
6
1539
1519
1499
1479
1540
1500
1460
0
1420
0
1540
50
1500
50
1460
100
1420
100
1380
150
1340
150
1380
England
1340
England
1459
1439
1539
0
1519
0
1499
50
1479
50
1459
100
1439
100
1419
150
1399
150
1419
Basle
1399
Basle
Debasements of largest denominations
0
7
1465
1534
1495
1533
0
1493
50
1453
50
1533
100
1493
100
1453
150
1413
150
1413
Genoa
1373
Genoa
1435
1405
0
1375
0
1495
50
1465
50
1435
100
1405
100
1375
150
1345
Florence
150
1345
1514
Proportional silver content of small change
Florence
1373
1494
0
1474
0
1534
50
1514
50
1494
100
1474
100
1454
150
1434
150
1454
Flanders
1434
Flanders
Debasements of largest denominations
0
8
1499
1479
1542
1522
1502
1482
0
1462
0
1542
50
1522
50
1502
100
1482
100
1462
150
1442
150
1442
Nuremberg
1422
Nuremberg
1461
0
1441
50
1421
50
1461
100
1441
100
1421
150
1401
Milan
150
1401
1459
Proportional silver content of small change
Milan
1422
1439
1419
0
1499
0
1479
50
1459
50
1439
100
1419
100
1399
150
1379
150
1399
Luebeck
1379
Luebeck
Debasements of largest denominations
1517
1497
1477
1457
1437
0
1517
0
1497
50
1477
50
1457
100
1437
100
1417
150
1397
150
1417
Strassburg
1397
Strassburg
Proportional silver content of small
change
Sources: See the appendix. Numerical ratios between small and large coins fluctuated in Genoa,
Nuremberg and Venice. All other currencies here shown were internally stable.
The data reveal that regardless of the rates of debasement which
the several currencies experienced, in most cases small silver coins were
not more quickly debased than larger denominations. In England, the
pound sterling almost always contained exactly as much silver when it
was made up of small coins as when it consisted of larger ones. In most
other currencies, small coins contained proportionally less silver than the
larger denominations (cf. Munro, 1988, p. 403), but there is no evidence
that this proportion grew over time. The only authority in the sample that
9
1421
0
1391
0
1361
50
1421
50
1391
100
1361
100
1331
150
1301
150
1331
Venice
1301
Venice
did disproportionally debase its smaller denominations was Florence. In
1472, the city introduced a token coinage, reducing the silver content of
the denaro from about 0,028g to a barely perceptible 0.008g. Thus, what
Sargent and Velde (2002, pp. 10, 210) call ‘the medieval money supply
mechanism’ does not seem to have played any important role in the
Middle Ages. It existed, but it was certainly no ‘pervasive and persistent’
phenomenon.
Let us next take a closer look at the explanation they offer for small
change depreciations. One of their core arguments is that small and large
denominations fulfilled different functions, large coins being useful in large
transactions only, while small coins could be used in both small and large
transactions. Strictly speaking this is true. However, as pointed out by
Schnabel (2005, p. 312) with regard to modern conditions, there is not
only a ‘penny-in-advance’, but also a ‘dollar-in-advance’ constraint: small
denominations can be used to buy expensive things, but large ones are
more convenient. To be sure, in the late Middle Ages sometimes even
small coins had a relatively high purchasing power (Munro, 1988, p. 393),
and there is practically no direct evidence that reveals which coins people
chose to use in which transactions. Still, some choices are more likely
than others. In early fifteenth-century Prussia, for example, most German
peasants paid an annual monetary rent of between 1¼ and 1½ marks
(Burleigh, 1984, p. 24). The coins circulating at that time in Prussia were
pennies and shillings. As the Prussian Mark (no coin but a ‘ghost’ unit)
was made up of 60 shillings or 720 pennies, it is likely that both peasants
and landlords preferred the larger denomination. According to Spufford
(1991, pp. 235 f.) the introduction of multiples of silver pennies such as
the Italian grossi (or the Prussian shillings) in the thirteenth and fourteenth
centuries was linked to the spread of urban wage labour and the
concurrent need to regularly pay large numbers of relatively modest
sums. By contrast, the slightly later decision to issue gold coins was
10
motivated by their usefulness in long-distance trade, in particular in trade
between the Italian cities and North Africa (Lopez, 1956). In all cases –
agriculture as well as industry and commerce – the issue was the
transaction costs per instance of exchange, which could be reduced by
employing larger units than the penny. Consumers would have been
prepared to use small coins to pay for expensive items if and when the
extra return on them as compared to that on larger coins would have
surpassed the transaction costs savings that large denominations made
possible. We can estimate neither side of this non-equation. However, in
a world of positive transaction costs, just checking that a large purchase
amounted to the correct sum when paid in small change must have been
so cumbersome and time-consuming that it is hard to imagine people did
it if they had an alternative.
Sargent and Velde’s explanation involves another problem. Their
argument is that in cases of small change shortages, governments would
reduce the standard of the smaller coins in order to produce more of
them. Here two assumptions are involved: first, that medieval rulers would
be able to monitor the development of the quantity of money in relation to
the demand for specific denominations, and second, that they would step
in to satisfy demand. Both assumptions are equally open to questions. A
ruler who kept his administrative apparatus under close control might
have some adequate notion of the output of his mint. However, this was
not necessarily the case. Even in the sixteenth century, control of the
bureaucracy was patchy at best; for example, in 1527 the duke of Prussia
was surprised to learn that the master of his mint had issued money for
years in the face of an official non-minting policy. Being questioned, the
master naively declared that he had just minted to cover his personal
expenses (Volckart, 1996, p. 410). Even if a ruler was well informed about
what went on in his mint, he had no means to find out the demand for
specific denominations; after all, he had no statistical apparatus, no clear
11
idea of how large the number of his subjects was, and not the slightest
notion of any aggregate values such as GDP etc. At best, he could rely
on information he received in the form of petitions or complaints passed
on to him by his counsellors. Unnecessary to say, such information might
be distorted in any number of ways. Finally, even supposing that rulers
received relatively reliable information on the output of their mints and on
the demand for money, why should they behave like benevolent dictators
from a welfare-economics textbook? When there were no external
constraints on their monetary policies, they would order their mints to
produce coins as long as it was profitable to do so, and when they were
strained for money, they would order those denominations to be produced
in larger quantities whose seignorage was higher. The former Minorite
monk and metal expert Burkhard Waldis, who, in 1532, wrote a
memorandum on monetary policies for the master of the Teutonic Order
in Livonia, put it in a nutshell: ‘If they may mint more than just one type of
coin, they mint that one most that brings them the highest profit’
(Arbusow, 1910, p. 799).1
In this context, Sargent and Velde (2002, pp. 49 ff.) claim that ‘per
unit of value, the production process made small coins more expensive to
produce than larger ones, since the same effort was required to strike a
coin of any size, and not much less to prepare smaller blanks than larger
blanks’. In consequence, small coins production ‘required either crosssubsidization of lower denominations by higher ones, or subsidization of
the mint by the government’. The argument is plausible, but not
conclusive. In many mints wages were paid not in proportion to the
number of coins produced, but rather in proportion to the quantity of fine
1
This is not to claim that there were never any other motives. Political authorities might
exercise their right of coinage just to demonstrate that they had it and to make a
statement about the range of their power. The city of Lueneburg did this in the fifteenth
century, as did the duke of Prussia in the sixteenth (North, 1990, p. 37; Volckart, 1997,
pp. 432 f.).
12
silver used in the production process. This was done in places as diverse
and far apart as Ulm in South-West Germany and Dorpat in Livonia
(Häberle, 1935, p. 75; Schwartz, 1905, pp. 61 f.). Where wages were a
proportion of output, their share in total costs was larger when the mint
produced small coins. In Prussia in the 1420s for example, the wages of
the coiners who struck the blanks amounted to 0.6 percent of the
production costs of shillings and to 9.1 percent of those of pennies.
However, here – as in most other places – the bullion content of the
smaller coins was proportionally lower. This more than outweighed the
larger share of the wages, so that minting pennies allowed a profit of 9.4
percent, whereas the profit of the production of shillings was only 1.7
percent (Volckart, 1996, pp. 99, 156). Further west, in the Hanseatic cities
of Wismar, Luebeck, Hamburg, Lueneburg and Bremen, seignorage rates
were similar (Sprandel, 1975, p. 158).
How about Sargent and Velde’s factual evidence for small change
shortages? They claim that pre-modern monetary systems were
repeatedly plagued by this problem. Occasionally complaints about
shortages of smaller denominations did surface (e.g. in Prussia 1391,
Volckart, 1996, p. 55), and given the priorities of the suppliers of money,
anything else would be a surprise. However, there is also potential
counter-evidence, some of which Sargent and Velde themselves cite. For
example, in 1365 the king of France ordered his mints to make new
pennies, but only one day every fortnight ‘for the needs of the people, so
that the gold coin may not rise above 16s. by the excessive quantity of
small coinage’. Sargent and Velde (2002, p. 135) treat this as proof that
small change was scarce, but it could be just as well read as evidence of
the opposite, that is, of an already existing ‘excessive quantity’ of small
coins which was not to be enlarged any further to prevent the exchange
rate of gold increasing. In fact, policies that can be interpreted as
attempts to limit the quantity of small coinage were not uncommon in the
13
late Middle Ages. For example, when the duke of Pomerania appointed
two new masters of the mint in 1500, he determined the maximum yearly
quantity of silver that they were to use to make pennies (Klempin, 1859,
pp. 585 f.). Whatever motivated such policies, they can be taken on their
own as proof neither of small change shortages nor of the opposite, that
is, of an oversupply of small coins. However, there is more direct
evidence indicating that at least occasionally there was an oversupply.
For example, in the 1420s and ‘30s, the Prussian estates repeatedly
complained that the country was flooded with pennies, shillings (the only
larger denomination) being produced in far too small quantities. Given the
Teutonic Order’s strained financial position in the decades after its defeat
at Tannenberg/Grunwald in 1410, and given the relative profitability of the
production of smaller and larger coins, this policy can not come as a
surprise. Of course, it could not be pursued indefinitely. At some point the
quantity of pennies would become so large that their purchasing power
fell below that of the silver they contained. In Prussia, the market took
care of this problem, with goldsmiths melting down pennies in order to
turn them into jewellery (Volckart, 1996, p. 402). Here the numerical
relation between denominations remained stable.2 On the whole, as
pointed out by Cipolla (1956, p. 32), periods of small change abundance
seem to have been as common as periods of scarcity.
Does all this mean that Sargent and Velde try to explain something
that happened a little bit with something that happened even less? Not
necessarily: there still may be something to the problem they discuss.
Many late medieval authorities did not only issue silver coins, at which we
have so far exclusively looked, but also coins of gold, which had a much
2
Despite the shillings’ proportionally higher content of bullion, the pennies did not drive
them out of circulation. Greshams’s law applies to monetary units that are perfect
substitutes. Due to the higher transaction costs involved in the use of smaller
denominations, this was here not the case.
14
higher purchasing power. The two types of coins did not form part of the
same currency, as most gold coins had no fixed face value, not being part
of the denominational structure based on silver (van der Wee, 1969, p.
374).3 In fact, they formed parallel second currencies. Unlike Cipolla
(1956, p. 32), who explicitly referred to the contrast between gold and
silver when he introduced ‘the big problem of the petty coins’ into the
academic literature, Sargent and Velde do not discuss the diverging rates
of debasements of denominations made up of different kinds of bullion.
However, their argument might apply to this context, as well; after all,
relative to high-purchasing power gold coins, silver coins were indeed
small change. So, was silver more rapidly debased than gold?
In order to determine whether this was the case, we can compare 8
gold and 23 silver currencies. The following graph charts the un-weighted
average of the yearly rates of change in the standard of these currencies,
the curve for silver being based on the bullion content of the largest
denominations.
3
The only government that seems to have consistently succeeded in enforcing the
circulation of gold at its nominal par value was that of England, where the gold noble
continuously equalled ⅓ of a silver pound sterling. In all other cases, foreign and
domestic gold coins usually seem to have circulated at flexible rates (for example the
Luebeck gulden had a varying exchange rate in silver marks of Luebeck) (cf. Miskimin,
1985/89).
15
Fig. 2: Yearly Rates of Change in the Standard of Gold and Silver
8
6
Change in percent
4
2
0
-2
-4
10 per. Mov. Avg. (silver mean)
1541
1531
1521
1511
1501
1491
1481
1471
1461
1451
1441
1431
1421
1411
1401
1391
1381
1371
1361
1351
1341
1331
1321
1311
-8
1301
-6
10 per. Mov. Avg. (gold mean)
Gold: English noble, Flemish noble, Florin, Genovino of Genoa, Hungarian ducat, Luebeck gulden,
Rhinegulden, Venetian ducat. Silver: Basel, Bern, Bohemia, Cologne, Constance, England,
Flanders, Florence, France, Genoa, Goslar, Hanover, Holland, Kempten, Luebeck, Meissen,
Milan, Nuremberg, Prussia, Strassburg, Venice, Vienna, Zuerich. Sources: See appendix. The
exceptionally tall peak for silver in the 1460 is due to the reinforcement of the Viennese penny
(‘schinderling’) following a period of severe debasement that led to one of the few medieval
episodes of hyperinflation.
Both types of currencies were occasionally reinforced: gold in the
1320s and again in the 1460s, and silver in the 1360s, between 1400 and
1420, in the 1460, again between 1490 and 1500 and finally in the 1530s,
but periods of debasement clearly dominate. In most periods, the silver
curve is lower and more volatile than the one for gold (the mean standard
deviation for gold is 0.002 and 0.068 for silver over the whole period),
indicating that silver currencies experienced more violent changes and
were on the whole debased more rapidly. We are still lacking much
information on the bullion content of late medieval money, but all data we
have suggest that this sample of altogether 31 currencies is
16
representative: Gold coins were more stable than even the largest
denominations made of silver. Hence, a phenomenon not unlike the one
Sargent and Velde set out to explain was really typical of monetary
conditions in fourteenth- to sixteenth-century Europe: coins with a low
purchasing power depreciated relative to those with a higher purchasing
power. What we need is an explanation of this phenomenon which fits the
historical record better than the one they suggest.
2.2. The basic commitment situation: why gold was more stable
than silver
In this paper, the diverging rates of depreciation for high- and lowpurchasing power coins are discussed in terms of political economy, with
the focus being first on the incentives that rulers faced, and then on the
way these changed under the influence of newly developed institutional
arrangements. At the most basic level, incentives were contradictory.
Nicolas Oresme, who wrote a widely read treatise on monetary policies in
the fourteenth century, nicely captured this conflict: On the one hand, he
declared to be convinced ‘that the main and final cause why the prince
pretends to the power of altering the coinage is the profit or gain which he
can get from it’ (Oresme, 1956, p. 24). Here he discussed debasements
introduced in order to achieve a short-term increase in revenues from the
seignorage, a motive that dominated for example French monetary
policies during the Hundred Years War, when in some years the share of
the profit from minting grew to two thirds of the total revenues of the
French crown (Spufford, 1991, p. 305). On the other hand, Oresme
(1956, p. 33) pointed out that ‘good merchandise or natural riches cease
to be brought into a kingdom in which money is so changed, since
merchants, other things being equal, prefer to pass over to those places
in which they receive sound and good money’. In this context, he implied
that debasements harmed the long-term revenues a prince could draw
17
from customs and market dues. This was felt by rulers such as for
example the dukes of Brunswick-Lueneburg, who in 1412 noted ‘that
many merchants avoid our lands with their merchandise, because of the
loss which they must bear and suffer due to those selfsame pennies [i.e.
those that had been debased], which does great damage to our customs
revenues and also to our other affairs’ (Jesse, 1924, p. 35). Annalists
mention similar occurrences, for example for the territory of the Teutonic
Order in the years following its defeat at Tannenberg/Grunwald: ‘The land
of Prussia was not visited by merchants due to the coinage that had been
very much debased…. And neither copper nor silver nor steel nor iron
came into the country’ (Hirsch et al., 1866, p. 348). To summarise, late
medieval governments faced the choice of trading seignorage for
customs and other revenues. As under modern conditions, creating stable
price expectations and refraining from discretionary policies equalled a
long-term investment. However, as Klein (1974, p. 449) pointed out,
modern politicians whose positions are not secure and whose time
horizon is comparatively short face strong incentives not to undertake this
investment. The same was the case in the period examined here.
The starting point of the analysis below is that fundamentally the
problem rulers had to solve was one of credibility: If they wanted to avoid
revenue losses due to the exit of owners of mobile factors of production
such as merchants, they had to convince consumers that they would
supply a stable currency not only at present, but also in future. The
question is then under which conditions rulers were able credibly to
commit to upholding stability. Commitment situations have in recent years
come into the focus of research (cf. Shepsle, 1991; North, 1993; Greif et
al., 1994; Greif, 2000; Boerner and Ritschl, 2002; Greif, 2005). Often, the
aim of this research is to analyse how agents can engage in mutually
profitable exchange in the absence of third party enforcement, or how
they can substitute third-party enforcement offered by the state – whose
18
services they may regard as partial, unreliable, costly, slow or undesirable
for some other reason – with other enforcement mechanisms. The focus
here is usually on economic markets, but mutually beneficial exchange
occurs in the political sphere too, and with a ruler involved, a third party
able to enforce the contract is missing by definition. Hence the theoretical
tools designed to analyse commitment situations on economic markets
are also useful in the analysis of political exchange.
The situation at issue here is a case in kind. Basically, the
exchange took place between a ruler, who supplied a currency and
demanded taxes or other dues, and the consumers who, preferred using
money over barter, therefore demanded a currency, and in return paid
taxes etc. In this, conditions in the Middle Ages did not fundamentally
differ from those assumed in models that are designed to capture the
present. For a modern government, reneging on the implicit contract that
links it with the consumers means setting an inflation rate that exceeds
the public’s expectations. For the consumers, it means evading taxes or
exiting the policy maker’s jurisdiction. The situation is structured like a
prisoners’ dilemma, and as it is repeated and the time horizon is infinite,
the actors’ interest in their reputation is sufficient to allow a cooperative
equilibrium to emerge, if the policy maker’s discount factor is high enough
(Barro and Gordon, 1983, pp. 108 ff.; Lohmann, 1998, pp. 9 f.).
Despite the overall similar structure of the situation, medieval
conditions differed in a number of important respects from modern ones.
As mentioned above, feudal rulers could reap windfalls from increasing
the seignorage, their incentive to renege being thus more direct and
personal than that of policy makers today. Medieval consumers, on the
other hand, had in principle more options than their modern counterparts
if they wanted to defect or to put pressure on a ruler whose defection they
had observed. Apart from evading taxes (which usually played a minor
19
role in the period analysed here), they could attempt to evade customs or
refuse to accept the currency that was locally provided.
This latter option, which in effect meant exiting to a different
supplier of money (cf. Hirschman, 1970), merits closer attention. If the
consumers’ actual or threatened exit was to enable the local ruler credibly
to commit himself to preserving monetary stability, a number of conditions
had to be given. In the first place, substitutes for the good he provided
had to exist, that is, there had to be competition in the money supply. The
competitive supply of money has been extensively discussed in the
literature on monetary theory (Klein, 1974; Hayek, 1976). While older
analyses claimed that money can not be supplied under conditions of
unregulated laissez-faire without leading to an infinite price level, Klein
(1974, pp. 426 f.) showed that this view was based on the implicit
assumption that firms would produce identical and undistinguishable
forms of money. If each supplier would instead produce a distinct and
distinguishable currency, and if these circulated side by side at flexible
market exchange rates, there would not be one general price level but
rather several levels in terms of the particular currencies. Conditions in
fourteenth- and fifteenth-century Europe closely corresponded to Klein’s
model. At that time, any kind of bullion-based money was in principle
acceptable anywhere, at the discretion of the consumers. For example,
Bohemian silver groschen were widely used all over Poland and Prussia,4
while coins jointly minted by the cities of Luebeck, Hamburg, Lueneburg
and Wismar were current not only in their home towns and in the region in
between, but in all North-Western Germany (Stefke, 1995, p. 126). Gold
in particular often circulated far from home. Thus, in the fourteenth
century, the Florentine florin was used all over Western Europe
4
An early fifteenth-century source from Prussia states that ‘according to the
[Bohemian] groschen, any merchant determines the price of his commodities in gold
and silver’ (Töppen, 1878, p. 266).
20
(Berghaus, 1965), while the Hungarian ducat played a similar role in EastCentral Europe (Huszár, 1970-72). In the fifteenth century, the
rhinegulden, struck by the archbishops of Cologne, Mainz and Trier and
by the count-palatine on the Rhine, was current in practically all Germany
(Weisenstein, 2002).
Models of currency competition are based on the assumption that
consumers are a homogeneous group in two respects: first with regard to
the information accessible to them (cf. Barro and Gordon, 1983), and
second with regard to the structure of their demand for money. The
importance of information as such is undisputed: Hayek (1976, pp. 58 ff.)
for example pointed out that in order to be able to choose among
currencies, consumers must be well-informed about the purchasing
power of the monies circulating side by side. What is disputed is whether
medieval consumers were willing or able to access comparable
information, i.e. data on the bullion content of the coinage. Thus, Sargent
and Velde (2002, p. 17) assume that money was used ‘by tale’, that is,
that consumers were concerned with the face value of the units they
handled rather than with the content of fine gold or silver.5 Rolnick et al.
(1996, p. 802), by contrast, claim that agents were aware of the intrinsic
value of money, using it ‘by weight’. However, there is abundant evidence
indicating that this cannot have been the case. For example, in the midfifteenth century, the council of the city of Cologne repeatedly complained
about the influx of foreign imitations of the domestic coinage (Stein, 1895,
pp. 310 f., 356). The council’s countermeasure was to cut any foreign
imitation that they detected in half (Stein, 1895, p. 341). This clearly
indicates that consumers were using money not by weight, but by tale:
5
This assumption implies that information – here: information on the bullion content of
the coinage – was not a free good and that transaction costs were positive. Oddly
enough, with regard to the use of small change in large transactions and to the
information on the supply of and demand for money, which was accessible to
politicians, Sargent and Velde’s implicit assumption is that transaction costs were zero.
21
damaging the coins reduced them to their material value. Other evidence
is from e.g. Hamburg, where in 1479 Johannes Zoltmann was jailed
because he had tried to sell rhineguldens that had been ‘so to say
falsified by clipping’ (Koppmann, 1878, p. 362). This was common
practice: already twenty years earlier, the council of Hamburg had
complained that ‘here in this city and its surroundings genuine
rhineguldens are being shaved and clipped, thereby losing their just
weight and content of bullion’. Similar incidents are recorded for 1567
(Bollandt, 1960, pp. 81, 421). Shaving and clipping the edges of coins
would obviously have been pointless if consumers had used them by
weight.
However, complaints such as those surfacing in Cologne and
Hamburg and countermeasures such as cutting foreign imitations in half
presuppose that some people at least did have access to information both
on the correct and the actual fine gold and fine silver content of the
coinage. Members of urban councils were often among these privileged
consumers, as many councils and other political authorities organized socalled assays, having foreign money chemically tested (cf. Ropp, 1878,
pp. 223 f.; Cahn, 1895, pp. 169 ff.; Munro, 1972, p. 212 ff.). Merchants,
money changers and goldsmiths also seem to have been better informed
than the average man on the street.6 The difference is stressed in a letter
written by the council of Koenigsberg to the grandmaster of the Teutonic
Order in 1521. The grandmaster had just begun another war against
Poland in the course of which he had debased his currency. The
councillors pointed out that so far, only merchants knew about the scale
of the debasements: ‘We will and can not disclose this to our common
people, for what wailing and lament they would raise if they learned of
6
This was indicated by Copernicus in the memorandum on monetary policies that he
submitted to the Prussian estates in the 1520s (Sommerfeld, 1978, p. 35).
22
this, your grace can easily imagine…’ (Arnold and Hubatsch, 1968, p.
218). While in practice there may have been finer distinctions, Sussman
and Zaira (2003, p. 1776) seem to be correct overall when they
distinguish between two groups of consumers, i.e. between experts on
the one hand, who were able to obtain information on the bullion content
of the coinage at relatively low costs, and less well-informed consumers
on the other, who were less able to assess the material value of money.
In the present context, the important point about this distinction is
the fact that the first group of consumers – specialists such as goldsmiths,
professional money changers, long-distance merchants and political
authorities who organised assays – was a small minority, whereas the
vast majority of the population – people most of whom were illiterate and
probably did not handle money on a day-to-day basis – faced prohibitive
costs when trying to obtain information about the fine gold or fine silver
content of the coinage. As coins circulating at that time were not marked
with their face values, and as even those belonging to the same currency
and having the same face value were not exactly identical, members of
this second group tended to value all monetary units at 1:1 that looked
superficially similar and had roughly the same weight. It was they who
used money by tale.
The other assumption about consumer homogeneity, on which
models of currency competition are based, concerns the structure of the
demand for money. Today, each polity supplies just one distinct currency,
which is used by all local consumers. In late medieval Europe, this was
not necessarily the case. As indicated in the previous section, many
rulers did not only provide silver money, but also gold. Both circulated
side by side (usually at flexible rates), but fulfilled different functions and
were demanded by different (though partly overlapping) groups of
consumers. Gold was predominantly used by consumers of the first group
characterised above, that is by long-distance merchants, goldsmiths or
23
money changers who were well-informed about the intrinsic value of the
coins they handled. Silver, on the other hand, dominated small-scale
exchange and local markets; it was used by people belonging to the
larger and less well-informed second group of consumers (Spufford,
1991, p. 283).
A further point should be noted in this context. There were relatively
cheap ways of obtaining information on the bullion content of the coinage:
apart from the specific know-how, all that was needed was a pair of
precision scales, a touchstone and a set of needles such as those
described e.g. by Georgius Agricola in his treatise on mining (Agricola,
1556/1912, pp. 253 ff.). Such needles were made of silver or gold of
differing, but known fineness. When the edge of the coin that was to be
tested was lightly rubbed on the stone, it left a gray or yellow streak,
whose colour could then be compared with lines left by the needles. In
this way, the fineness of a coin could be determined to within at least 4
percent, and an expert with some experience could achieve an accuracy
of 2-3 percent (Gandal and Sussman, 1997, pp. 443 f.). Better results
required melting the coin. The important point about this is that relative to
the value of the coin, the costs of testing gold were lower or, conversely,
the costs of not testing it higher. Therefore even expert consumers would
be more ready to make sure that the high-purchasing power gold coins,
which they handled, had the correct bullion content than to perform
similar tests on low-purchasing power coins made of silver.
Informational asymmetries, the differing structure of demand and
the different incentives for analysing gold and silver coins had crucial
implications for the ability of rulers credibly to commit to monetary
stability. As the evidence of clipped and shaved rhineguldens shows,
24
there must have been consumers who used such coins by tale,7 but most
consumers of gold belonged to the relatively small first group whose
members were better-informed about monetary standards than the
average customer on local markets. They were therefore in the position to
refuse to accept currencies that they regarded as instable. Under these
conditions, a ruler who debased his gold just drove gold consumers into
the arms of his competitors, who supplied more stable types of guldens.
Note that this outcome is the same regardless of whether we assume a
hypothetical perfectly informed consumer or, more realistically, just a
relatively well-informed one. A perfectly informed consumer would have
recognised debased gold without the need to perform any tedious tests,
for example when the mint offered it to him, and would then have been
willing to accept the coin at its material value. However, the mint would
not have been prepared to sell it at that price because the whole point of
the debasement was increasing the seignorage that resulted from the
difference between the coin’s nominal and material value. The perfectly
informed consumer would then have turned to other suppliers of gold, just
as the relatively well-informed consumer would have done after testing
the coinage. So, no matter what we assume with regard to information,
where the supply of gold was concerned reputation was sufficient as a
mechanism to ensure a ruler’s compliance with the implicit contracts that
linked him and the minority group of consumers. The result was the
relative stability of the gold currencies issued between the fourteenth and
the sixteenth centuries and shown in fig. 2 above.8
7
This was also the case in England where the English noble and its Flemish imitation
(whose content of fine gold was lower) circulated at par (Munro, 2000, p. 187). The
English government enjoyed an exceptionally good reputation in monetary policies,
providing one of the most stable silver currencies of Europe (Spufford, 1991, p. 295).
Arguably, English consumers were therefore more trustful than consumers elsewhere.
8
There is a broad literature on the importance of information for the establishment of
cooperative equilibria in prisoner dilemma situations. Important contributions were
made by Kreps et al. (1982) and Milgrom et al. (1990). For fear of a loss of reputation,
25
Commitment to stable silver, on the other hand, was not possible
that easily, as any ruler who debased his silver coinage would still find
consumers willing to accept his inferior product. These consumers were
not necessarily all badly-informed. Even well-informed specialists might
be interested in debased silver as long as they could pass on these coins
to the majority group of badly-informed consumers (they could not do this
with gold because the majority of consumers did not demand gold). In
1539, the council of Hamburg gave a vivid description of such practices,
claiming
‘that several burghers and inhabitants of this city bring whole tons
and sacks of underweight three- and sixpenny pieces and other
coins from outside into this city, and use these to buy up and export
the cities’ good shillings, talers, mark pieces and other good coins,
thereby looking for their own advantage and acting against the
common weal, to the detriment of all good money’ (Bollandt, 1960,
p. 322).
Eventually knowledge about the low bullion content would spread to
the wider population; whilst at the same time people would realise that
money was less tight (cf. Sussman and Zeira, 2003). The result would
then be a rise in nominal prices. As for the commitment problem, the
important point is that Gresham’s law, which is frequently claimed only to
hold for monetary units whose exchange rates are legally fixed (Hayek,
1976, p. 35), could operate on the late medieval market for silver
currencies even when no political authority tried to impose exchange
relations. Suppliers of silver could therefore behave as if they had no
competitors and as if consumers had no exit option. Under such
circumstances, rulers could not credibly commit to the stability of silver
most princes preferred introducing new types of gold coins – easily recognisable due to
their new design – to simply changing the bullion content of an existing type. This limits
the number of gold currencies available for analysis over extended periods of time.
26
currencies. Small wonder that they debased them to the extent indicated
in fig. 2. The interaction between rulers and consumers being structured
like a sequential game, it is possible to represent it in a stylised form:
Fig. 3: The commitment-game between suppliers of money and consumers
T > 0; u - T > 0
conforms
ruler
reneges
ς seignorage
T taxes
u utility of currency
ς + T > 0; u - T < 0
silver outcome
0; u - T > 0
gold outcome
conform
consumers
renege
Rulers can conform, providing a stable currency, in which case they
receive no seignorage but taxes. For the consumers, the payoff consists
of the utility of a stable currency minus the taxes they pay; it is still
positive. Rulers can also renege, that is, debase the currency. If they do
this with silver, they receive not only taxes but also a seignorage, while
once information on the reduced standard of the coinage has spread, the
consumers face the disutility of a debased currency on top of having to
pay taxes. If rulers debase gold, however, consumers quickly notice this.
Rulers will consequently receive no seignorage (being unable to sell their
debased gold) and no taxes (having driven away the consumers). The
consumers, on the other hand, enjoy the utility of an alternative goldbased currency, to whose supplier they pay taxes. Where silver is
concerned, reneging is the dominant strategy for rulers, giving them their
optimal payoff of seignorage plus taxes. However, for gold, conforming is
27
dominant because receiving taxes and no seignorage is better than
receiving neither.9 This – and not the rulers’ well-meaning but misguided
attempts to satisfy demand for small change by debasing the coinage –
caused what Cipolla (1956) called ‘the big problem of the petty coins’.
2.3. The advanced commitment situation: a solution for silver
Was there a solution to this problem in the late Middle Ages? The
answer to this question is a tentative ‘yes’. As a matter of fact, the
difference between commitment regarding the issue of stable silver and
gold was not fundamental but rather one of degree. Practically all
merchants used silver for smaller purchases, retailing or in some regions
such as the Baltic even for large payments (Spufford, 1991, pp. 282 f.).
They could react to the supply of debased units of this metal just as they
could react to the supply of debased gold. They could, for example,
evade customs, as in the relatively small territories of BrunswickLueneburg or Prussia at the beginning of the fifteenth century. Still, on its
own the fact that the few well-informed merchants, moneychangers and
goldsmiths, who were unhappy with the money supplied by a local ruler,
did have an exit option was insufficient to enable rulers to credibly commit
to preserving the stability of their silver – after all, there was a large group
of badly-informed consumers willing to accept debased coins. Under such
conditions, reputation was no effective enforcement mechanism, so that
rulers had to find a way to bind themselves if they wanted to credibly
commit to monetary stability.
Involving an independent authority in the management of the currency
was the solution most feudal rulers found. Thus, in 1380 the grandmaster
9
As Greif (2005, pp. 753 f.) pointed out, ‘[t]he prospect of losing future economic gains
following an abuse can constrain coercive power even in the absence of countervailing
coercive power. … Abuses can also be deterred by the expectation that the economic
agents will shift their activities following an abuse in a manner that would be costly to
the abuser’.
28
of the Teutonic Order decided to introduce a formalised procedure of
control, which was supposed to increase confidence in the coinage he
produced in his mint at Thorn: ‘And if the burghers were present at the
inspection and emission of the money we would be pleased to see that,
so that in all things one might be the surer and more certain’ (Volckart,
1996, p. 396). Further west, urban rights of control had been established
earlier. For example, already in 1189 Emperor Frederick I had conceded
‘the right … to examine the pennies made by the coiners as to their
weight and fineness’ to the burghers of the city of Hamburg (Jesse, 1924,
p. 27; cf. Berghaus, 1964, p. 77; Nau, 1964a, p. 145 ). A ruler who
granted such rights did not directly commit himself to preserving the
established standard of the coinage, but rather to publicising any changes
of this standard. Urban control of a princely mint was thus a means of
spreading information about whether the ruler reneged on the implicit
contract between himself and the consumers who used his money. With
this information, reputation could function as a commitment device,
allowing individuals, who otherwise would not have been able to detect
clandestine debasements, to credibly threaten to choose a more reliable
supplier.10 This, in turn, gave the rulers an incentive to comply with the
contract. Thus granting rights of control to the cities allowed princes to
commit to monetary stability, even though their commitment was indirect
and probably relatively weak.
A more credible commitment required stronger measures, i.e. the
establishment of an authority that was not only independent and had the
right to supervise the coinage, but that could also take over the entire
10
Milgrom et al. (1990) show that in the absence of third party enforcement, facilitating
the spread of information about defaulters allows agents on otherwise anonymous
markets credibly to commit to contracts. Cf. Greif (2005, pp. 733 f.).
29
management of monetary policies.11 This is a policy to which the
institutional environment of the Holy Roman Empire was eminently
suitable, as rights claimed by political authorities had long become an
object of exchange (Landwehr, 1971/86). The dukes of BrunswickLueneburg, who realised that their revenues suffered from the exit of
mercantile capital due to the debasement of their coinage, chose this
solution in 1412. As usual in the Middle Ages, they did not create a costly
new bureaucratic apparatus but made use of an organisation that already
existed: They transferred the right to issue their currency to the largest
and most influential city within their territory, giving the burghers and
magistrates of Brunswick the exclusive right ‘to make and manufacture
coins at which time and in whatever quantity they deem to be fit, and with
whatever mark and sign may seem convenient to them, which coins shall
be current and acceptable in all our lands of Brunswick… The mint shall
for ever be and remain to be in the free ownership of our faithful subjects,
the council and burghers of our city of Brunswick’. A little later it
transpired that the city had paid almost 4000 marks of silver – that is,
nearly 1 ton – for this privilege (Jesse, 1924, pp. 35 f.). By the middle of
the sixteenth century, similar rights had been acquired by at least 80 to 90
Central European cities (Berghaus, 1964; Nau, 1964a; 1964b).
The grant to Brunswick was exceptional as the document, in which
it was recorded, explicitly justified it with the exit of merchants and with
revenue losses that the dukes suffered due to debasements. In most
cases, by contrast, the motives of the parties involved were not
11
Comparable strategies were analyzed by Greif (2005, p. 755): ‘By not creating an
effective administration to govern a particular economic sphere, a ruler can commit not
to abuse rights in that sphere because limited administration increases his cost of
confiscation. … By being absent from a particular economic sphere – in the sense of
not having an effective administration – a state can better commit to respect rights. …
Commitment to not abuse the rights of asset holders can also be achieved by
delegating state administration to these asset holders. Instead of having an
administration controlled by the state, public goods and services to the state are
provided directly by the asset holders’.
30
mentioned. The fact that not only Brunswick but many other cities were
prepared to pay for such a right doubtless played a part. Still, in the
present context motives are of secondary importance. The transfer of the
right of coinage to a city may have been due to all kinds of
considerations; regardless of what a ruler tried to achieve, the (possibly
unintended) outcome of his decision was that he created a strong
constraint on his future monetary policies. In fact, giving up his right to
meddle with the coinage was the strongest conceivable means to restrict
his future scope of action. He would not only never again have the
chance to profit from debasements, but would also acquire a strong
interest in monetary stability – after all, some of the coins struck by the
city to which he transferred the right to determine monetary policies would
find their way into his coffers through the payment of customs and other
dues. Functionally, such a transfer was therefore equivalent to
establishing an independent central bank.
Still, this solution to the credibility problem posed two problems of
its own, both of which have parallels under modern conditions. Firstly, as
Lohmann (1998, p. 11) pointed out: ‘If the policy maker cares strongly
about the future, she can directly commit herself to the ex ante optimal
monetary policy path. So why would she bother making institutional
commitments…?’ In other words: where is the difference between
committing to upholding monetary stability in the first place and
committing to respecting the independence of the central bank – or, in the
present case, the exclusive urban right of coinage –, once this has been
established? Political actors in the late Middle Ages were fully aware of
this problem. Thus, when the dukes of Brunswick-Lueneburg concluded
their contract with the city of Brunswick, they promised that neither they
themselves nor their ‘heirs and successors (would) … set up, hold or
have another mint, nor allow others to do so in any way in our lands of
Brunswick’ (Jesse, 1924, p. 35). In a similar vein, when the duke of
31
Mecklenburg granted the right to mint pennies to the city of Wismar, he
promised not to strike any pennies of the type issued there; ‘however, if
we want to have pennies minted …, we will mint or make them equal to
and in the same manner as Slavic pennies’ (Jesse, 1924, pp. 32 f.) –
these could easily be distinguished from the money of Wismar.
In the absence of effective third party enforcement, why did rulers
comply with such clauses? Here again reputation was crucial, allowing
public commitment to a rule (Lohmann, 1998, p. 15). This commitment
would be effective even though the supply of silver was concerned, and
the number of consumers was greater and their ability to acquire
information smaller than in the case of gold. The difference was that once
an exclusive minting right had been transferred to a city, any defection by
the ruler would be much more obvious. If he, being the local supplier,
clandestinely reduced the standard of his silver coinage, most consumers
would realise this only after some time. By contrast, if he, having once
renounced his right of coinage in favour of a city, began to issue money
again, even illiterate consumers would notice this – except, of course, if
his coins were such close imitations of those struck by the city that he
was, in effect, committing an act of forgery. Still, even then he had to buy
the necessary raw materials, which would raise distrust if he did it locally,
or involve high costs if he tried to import them on his own. Thus, the
transfer of the right of coinage from a feudal ruler to a city amounted to
the establishment of a mechanism that would make information on the
ruler’s defection readily available. If he violated the rule, he would pay a
political price or, to use a term coined by Lohmann (2003, p. 100), an
‘audience cost’ – the audience being the consumers who now were able
to detect his defection. In this way, he would be able credibly to commit to
respecting the stability of the local silver coinage.
The second problem that emerged with the transfer of the right of
coinage concerns the reliability of the central bank, that is, under
32
medieval conditions, the behaviour of the magistrates of a city that had
been granted a mint. The question is under which conditions such an
independent body would itself be willing to commit to monetary stability
(cf. Ireland, 2002, p. 10). It might seem that the transfer of the right of
coinage would just amount to moving the commitment problem to a lower
level. After all, urban councils faced similar incentives to debase the
currency, frequently suffering from raising expenditures and accumulating
deficits (Berghaus, 1964, p. 83; Dhont, 1964, pp. 354 f.). To be sure, they
were not immune to the lure of debasements. However, committing to the
preservation of monetary stability posed a less serious problem to them
than to princes. For one thing, most councils were dominated by patrician
elites that were composed either of merchants or of ex-merchants who
had acquired landed property, living off rents paid by their peasants.
Export-oriented producers who might have been interested in
devaluations were usually not represented (Wensky, 2002). Therefore,
members of most councils would not individually have benefited from the
circulation of debased money. Also, in contrast to a feudal ruler, none of
them could have made a personal profit by increasing the seignorage.
Furthermore, because it was not a single actor such as a prince who
determined monetary policies, but rather a group of people, the costs of
making decisions about changes to the standard of the coinage were
comparatively high. Finally, urban councils had to take the mood of their
citizenry into account. Unpredictable and violent reactions to the
decisions concerning the coinage would hit them much more directly than
they would hit a feudal prince, living safely in his castle. This is what
happened in Brunswick in the later fifteenth century, when the council
took some drastic measures in monetary policies. The consequence was
a large-scale uprising where the rioters chanted ‘mint master – head off’
(Bote, 1880, p. 427). Thus, here too, reputation was at the heart of the
matter.
33
To summarize, there were several mechanisms which should have
allowed councils credibly to commit to the preservation of monetary
stability – more credibly than princes, at any rate. Urban currencies
should consequently have been more stable. To determine whether this
was the case, we will ignore cases where cities just had the right to
supervise princely mints, and concentrate on the distinction between
currencies issued by feudal and urban authorities. As urban rights of
coinage were a predominantly Central European phenomenon, we also
restrict the analysis to this area. The following graph charts the unweighted average of the yearly rates of change in the standard of 6 feudal
and 10 urban currencies.
Fig. 4: Yearly rates of change in the standard of princely and urban currencies
8
6
Change in percent
4
2
0
-2
-4
10 per. Mov. Avg. (princes mean)
1541
1531
1521
1511
1501
1491
1481
1471
1461
1451
1441
1431
1421
1411
1401
1391
1381
1371
1361
1351
1341
1331
1321
1311
-8
1301
-6
10 per. Mov. Avg. (cities mean)
Princely: Bohemia, Flanders, Holland, Meissen, Prussia, Vienna; urban: Basel, Bern, Cologne,
Constance, Goslar, Hanover, Kempten, Nuremberg, Strassburg, Zuerich. Sources: See appendix.
For the extreme volatility of princely currencies in the 1450s and early 1460 see fig. 2 above.
34
Both curves are roughly parallel, with common peaks (periods of
reinforcement) in about 1410, 1470, 1490-1500 and 1530, and common
troughs (periods of exceptionally strong debasements) in about 1340-50,
1390-1400, 1490, 1510 and 1540-50. This suggests that their course is
not random, that is, that urban and princely monetary policies either were
interdependent or subject to common external shocks. However, on the
whole differences are more readily apparent than similarities, and
interestingly, the main difference between urban and princely currencies
is not in their rates of debasement but rather in their volatility. For the
whole period, the mean standard deviation for urban currencies is 0.021,
while that for princely currencies is 0.068; the latter were therefore on
average about three times as volatile as the former. The sample is
relatively small, as we still lack much information in particular on the
standard of princely currencies which, due to the primitive state of
development of territorial bureaucracies, is less well recorded than the
coinage produced by cities. However, it is plausible that on the whole,
princely currencies were affected more often by changes in their standard
than urban ones, and that these changes were more violent. Hence,
granting a city the right to strike its own coins was really a way for a ruler
to credibly commit to respecting monetary stability. The result was not the
introduction of a token coinage, but low-purchasing power coins were at
least supplied in a more predictable way than otherwise. This was a
viable solution to the ‘big problem of the petty coins’.
3.
Conclusion
This paper takes its cue from a classic lecture given by Carlo M.
Cipolla (1956) in 1953. There, Cipolla examined the problems many late
medieval governments had with the supply of a stable currency
composed of low-purchasing power denominations (made of silver).
35
Interestingly, high-purchasing power coins (made of gold) posed no such
problems. The present study offers a systematic explanation of this
phenomenon, shows how the problem could be solved, and at the same
time contests the explanation recently advanced by Sargent and Velde
(2002).
A closer examination of their arguments reveals that they
misunderstood Cipolla, arguing that even in currencies based on silver
alone, the depreciation of small coins relative to larger ones was a
‘persistent and pervasive’ phenomenon. Data on monetary standards
show, by contrast, that while such depreciations and the concurrent
debasements occasionally did occur in the late Middle Ages and at the
beginning of the early modern era, they were rather exceptional. Sargent
and Velde’s model is moreover based on a number of implicit
assumptions which contradict each other at least in part: On one hand,
the authors assume that consumers use money by tale, which implies
that information on the bullion content of the coinage is not free and that
transaction costs are positive; on the other hand, however, consumers
are willing to pay for large items with petty coins, which makes sense only
when transaction costs are zero. Furthermore, politicians are not only
perfectly informed about the supply of and demand for specific
denominations – which again implies free information and zero
transaction costs –, they are also willing to act in the public interest, which
they correctly perceive. These assumptions are not only inconsistent, but
(apart from the one relating to consumers who used money by tale) also
lacking support from what late medieval sources reveal of human
behaviour. Thus, Sargent and Velde’s attempt to explain economic policy
without political economy fails for two reasons: empirically because while
small change depreciation and debasement relative to large coins did
occur in the fourteenth to sixteenth centuries, it was no ‘pervasive and
persistent’ phenomenon but a rare exception, and theoretically because
36
their model is based on inconsistent assumptions. An alternative
explanation that explicitly refers to the problem first identified by Cipolla
must take positive transaction costs, imperfect information and selfinterested behaviour into account – it must, in short, be compatible with
modern political economy.
The underlying hypothesis of the explanation suggested here is
that the rapid debasement of silver relative to gold was a result of the
weak ability of late medieval rulers to credibly commit to upholding the
stability of silver currencies. Commitment was important both for the longterm welfare of their subjects and for their princely revenues, as many
rulers realised. However, incentives not to commit or to violate a
commitment once made were strong. After all, under the conditions of a
commodity money system such as that then existing, it was possible to
reap a profit from increasing the seignorage. As the need of a ruler to
require short term funds was common knowledge, it was difficult to
credibly commit to the preservation of monetary stability.
To analyse this commitment situation, it is here modelled as an
instance of exchange between the ruler who provides a currency and the
consumers who pay taxes and other dues, notably custom duties. Both
sides of this market are linked by implicit contracts. For the ruler, reneging
means secretly decreasing the standard of the coinage, for the
consumers to evade taxes or customs or to refuse to accept the money
locally supplied. In this context, the common assumption of homogeneous
consumers is relaxed, with two groups of consumers being distinguished:
on one hand, there are those who are able at low costs to acquire
information about the bullion content of the coins which they handle. This
group is primarily composed of merchants active in long-distance trade.
On the other hand, there are consumers for whom the acquisition of this
type of information is more costly; this group consists of practically
everybody else. A further assumption is that both groups of consumers
37
demand different kinds of money, merchants being interested in gold
coins which they can use in large-scale transactions or international
markets, while the other group needs silver for their local retail trade or for
small day-to-day consumer transactions.
As rulers and consumers interact not only once but repeatedly, and
as interaction is usually open ended, reputation is potentially sufficient to
ensure prolonged cooperation, i.e. to enable rulers to commit credibly to
monetary stability. However, this is only the case if two conditions hold:
First, information on a ruler’s defection must spread quickly among
consumers, and second, consumers must have a chance to react to a
ruler’s violation of the contract by reneging themselves. These conditions
exist for the first group of consumers, i.e. for merchants. Merchants
quickly notice reductions in the standard of the coinage they demand, that
is, in its content of fine gold, and are furthermore able either to exit the
reneging ruler’s territory (thus evading taxes or customs) or to substitute
local gold with gold supplied by more reliable producers abroad. Hence,
reputation is sufficient to enable rulers credibly to commit to the stability of
their gold coinage. The conditions are not present as far as the second
group of consumers is concerned, among whom changes in the standard
of the silver coinage remain undetected for longer periods of time, and
who have fewer chances to exit the ruler’s territory or to substitute his
coinage with foreign silver money. Hence, credible commitment is
impossible in this situation. What is to be expected from this is that late
medieval rulers would supply a relatively stable coinage in gold, but would
reduce the standard of their silver coinage much more quickly. This is
supported by the data.
However, long-distance merchants did not only demand gold, but
also silver, which they occasionally needed for large transactions and
frequently for business they conducted with local traders. In such cases,
the exit of merchants unsatisfied with the locally supplied silver would
38
provide rulers with an incentive credibly to commit themselves to the
stability of their silver currency, though the incentive would be weak due
to the rulers’ chance of finding consumers unable to notice debasements.
In this situation, a ruler had to bind himself to the contract, that is, he had
to find a way that made it impossible for him to renege. Transferring the
right to issue coinage to an independent authority was such a method. In
the late Middle Ages, this independent authority would usually be a town.
Rulers could credibly commit to respecting exclusive minting right
granted to a town because here their defection would be immediately
obvious. Urban authorities, too, had to credibly commit to the preservation
of monetary stability. However, for them this was easier than for territorial
rulers: They were governed by councils, whose members would not have
benefited individually from reductions of the standard of the coinage.
Furthermore, such reductions required an agreement among the council
members which was costly to reach, and finally, councils were directly
affected by urban unrest due to discontent with the coinage.
Consequently, cities debased their coinage less frequently than territorial
rulers. Thus, conferring the right to determine monetary policies to them
really made the rulers’ commitment to monetary stability credible.
To summarize, the stability of high-purchasing power gold coins
relative to low-purchasing power silver money was due to the fact that
gold was demanded by consumers able to detect a ruler’s defection and
to exit to another supplier; here, reputation allowed the ruler to commit
credibly to monetary stability. Consumers of silver faced higher costs
when they wanted to detect changes in the standard and were therefore
willing to accept debased coins. This caused Cipolla’s ‘big problem of the
petty coins’. The problem could be solved by establishing an independent
agency responsible for monetary policies. As infringements of this
agency’s independence would be immediately obvious to a wider
audience, the ruler could here enter a credible commitment. Data on the
39
rates of debasements of urban and princely currencies support the
conclusion that this mechanism by and large solved the problem of
maintaining the stability of low-purchasing power silver coins.
40
Appendix: The currencies
Fig. 5: Fine gold content, indices (earliest documented value = 100)
Florentine florin
41
1488
1468
1448
1461
1421
1492
1462
1432
1402
0
1508
0
1468
50
1428
50
1388
100
1348
100
1372
Luebeck gulden
1342
Hungarian ducat
1381
1341
1492
1452
1412
0
1372
0
1332
50
1292
50
1252
100
1301
Genovino of Genoa
100
1308
1428
0
1464
0
1434
50
1404
50
1374
100
1344
100
1408
Flemish noble
1388
English noble
1501
1541
1477
1497
1461
1421
1341
1301
0
1545
0
1505
50
1465
50
1425
100
1385
100
1381
Venetian ducat
Rhinegulden
Fig. 6: Fine silver equivalent of the units of account, indices (earliest
documented value = 100)
42
1457
1437
1557
1527
1497
1467
1437
1407
1566
1536
1506
1476
1446
0
1416
0
1386
50
1356
50
1326
100
1296
100
1377
Mark of Cologne
1347
Schock groschen (Bohemia)
1417
1544
0
1504
0
1464
50
1424
50
1384
100
1344
100
1397
Pound of Bern
1377
Pound of Basle
43
1544
1504
1464
1505
1465
1565
1525
1485
1445
1530
0
1490
0
1450
50
1410
50
1370
100
1330
100
1405
Lira of Genoa
1365
Livre tournois (France)
1425
1532
0
1492
0
1452
50
1412
50
1372
100
1332
100
1385
Lira of Florence
1345
Pound grote (Flanders)
1424
0
1525
0
1495
50
1465
50
1435
100
1405
100
1384
Pound sterling (England)
1344
Pound of Constance
100
100
50
50
0
0
44
1485
Mark of Luebeck
1465
0
1523
1503
1483
1463
1443
1423
Pound of Holland
1445
0
1427
0
1425
50
1407
0
1405
50
1387
50
1385
100
1367
50
1532
1502
1472
1442
1412
1382
1352
1322
1570
1530
1490
1450
1410
1370
1330
1290
100
1365
100
1347
100
1345
1530
1500
1470
1440
1410
1380
1350
Pound of Goslar
Pound of Hanover
Pound of Kempten
Schock groschen (Meissen)
100
100
50
50
0
0
45
1462
1442
1422
Lira a grossi (Venice)
1402
0
1382
1513
1473
1433
50
1362
100
1393
Mark of Prussia
1342
0
1353
0
1322
50
1313
50
1302
1524
1494
1464
1434
1404
100
1558
1528
1498
1468
1438
1408
1378
1461
1441
1421
1401
100
1282
1421
1391
1361
1331
1374
0
1301
Lira of Milan
Pound of Nuremberg
Pound of Strassburg
100
50
Pound of Vienna
Pound of Zuerich
100
1430
1400
1370
1340
1310
1280
0
1250
50
Gold: English noble (Challis, 1992); Flemish noble (Munro, 1972; Pusch, 1932);
Florentine florin (Bernocchi, 1976); Genovino of Genoa (Pesce and Felloni, 1976),
Hungarian ducat (Huszár, 1970-72; Schalk, 1880); Luebeck gulden (Dittmer, 1860;
Ropp, 1878; Schäfer, 1888);Rhinegulden (Weisenstein, 2002), Venetian ducat (Lane
and Mueller, 1985). Silver: Basle (Harms, 1907; Altherr, 1910; Cahn, 1901), Bern
(Cahn, 1901; Geiger, 1968), Bohemia (Castelin, 1973), Cologne (Metz, 1990),
Constance (Cahn, 1911), England (Challis, 1992), Flanders (Munro, 1972; Pusch,
1932), Florence (Bernocchi, 1976), France (Blanchet and Dieudonné, 1912), Genoa
(Pesce and Felloni, 1976), Goslar (Buck et al., 1995), Hanover (Buck and Meier, 1935),
Holland (Grolle, 2000), Kempten (Cahn, 1911; Häberle, 1935), Luebeck (Jesse, 1928),
Meissen (Krug, 1974), Milan (Cipolla, 1990); Nuremberg (Scholler, 1916), Prussia
(Volckart, 1996), Strassburg (Cahn, 1895), Venice (Lane and Mueller, 1985), Vienna
(Huber, 1871; Schalk, 1880), Zuerich (Schwarz, 1940; Wielandt, 1959).
46
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55
LONDON SCHOOL OF ECONOMICS
ECONOMIC HISTORY DEPARTMENT WORKING PAPERS
(from 2003 onwards) For a full list of titles visit our webpage at
http://www.lse.ac.uk/
2003
WP70
The Decline and Fall of the European Film Industry: Sunk Costs,
Market Size and Market Structure, 1890-1927
Gerben Bakker
WP71
The globalisation of codfish and wool: Spanish-English-North
American triangular trade in the early modern period
Regina Grafe
WP72
Piece rates and learning: understanding work and production in
the New England textile industry a century ago
Timothy Leunig
WP73
Workers and ‘Subalterns’. A comparative study of labour in
Africa, Asia and Latin America
Colin M. Lewis (editor)
WP74
Was the Bundesbank’s credibility undermined during the
process of German reunification?
Matthias Morys
WP75
Steam as a General Purpose Technology: A Growth Accounting
Perspective
Nicholas F. R. Crafts
WP76
Fact or Fiction? Re-examination of Chinese Premodern
Population Statistics
Kent G. Deng
WP77
Autarkic Policy and Efficiency in Spanish Industrial Sector. An
Estimation of the Domestic Resource Cost in 1958.
Elena Martínez Ruiz
WP78
The Post-War Rise of World Trade: Does the Bretton Woods
System Deserve Credit?
Andrew G. Terborgh
WP79
Quantifying the Contribution of Technological Change to
Economic Growth in Different Eras: A Review of the Evidence
Nicholas F. R. Crafts
WP80
Bureau Competition and Economic Policies in Nazi Germany,
1933-39
Oliver Volckart
2004
WP81
At the origins of increased productivity growth in services.
Productivity, social savings and the consumer surplus of the film
industry, 1900-1938
Gerben Bakker
WP82
The Effects of the 1925 Portuguese Bank Note Crisis
Henry Wigan
WP83
Trade, Convergence and Globalisation: the dynamics of change
in the international income distribution, 1950-1998
Philip Epstein, Peter Howlett & Max-Stephan Schulze
WP84
Reconstructing the Industrial Revolution: Analyses, Perceptions
and Conceptions of Britain’s Precocious Transition to Europe’s
First Industrial Society
Giorgio Riello & Patrick K. O’Brien
WP85
The Canton of Berne as an Investor on the London Capital
Market in the 18th Century
Stefan Altorfer
WP86
News from London: Greek Government Bonds on the London
Stock Exchange, 1914-1929
Olga Christodoulaki & Jeremy Penzer
WP87
The World Economy in the 1990s: A Long Run Perspective
Nicholas F.R. Crafts
2005
WP88
Labour Market Adjustment to Economic Downturns in the
Catalan textile industry, 1880-1910. Did Employers Breach
Implicit Contracts?
Jordi Domenech
WP89
Business Culture and Entrepreneurship in the Ionian Islands
under British Rule, 1815-1864
Sakis Gekas
WP90
Ottoman State Finance: A Study of Fiscal Deficits and Internal
Debt in 1859-63
Keiko Kiyotaki
WP91
Fiscal and Financial Preconditions for the Rise of British Naval
Hegemony 1485-1815
Patrick Karl O’Brien
WP92
An Estimate of Imperial Austria’s Gross Domestic Fixed Capital
Stock, 1870-1913: Methods, Sources and Results
Max-Stephan Schulze
2006
WP93
Harbingers of Dissolution? Grain Prices, Borders and
Nationalism in the Hapsburg Economy before the First World
War
Max-Stephan Schulze and Nikolaus Wolf
WP94
Rodney Hilton, Marxism and the Transition from Feudalism to
Capitalism
S. R. Epstein
Forthcoming in C. Dyer, P. Cross, C. Wickham (eds.)
Rodney Hilton’s Middle Ages, 400-1600 Cambridge UP 2007
WP95
Mercantilist Institutions for the Pursuit of Power with Profit. The
Management of Britain’s National Debt, 1756-1815
Patrick Karl O’Brien
WP96
Gresham on Horseback: The Monetary Roots of Spanish
American Political Fragmentation in the Nineteenth Century
Maria Alejandra Irigoin
2007
WP97
An Historical Analysis of the Expansion of Compulsory Schooling
in Europe after the Second World War
Martina Viarengo
WP98
Universal Banking Failure? An Analysis of the Contrasting
Responses of the Amsterdamsche Bank and the Rotterdamsche
Bankvereeniging to the Dutch Financial Crisis of the 1920s
Christopher Louis Colvin
WP99
The Triumph and Denouement of the British Fiscal State: Taxation
for the Wars against Revolutionary and Napoleonic France, 17931815.
Patrick Karl O’Brien
WP100
Origins of Catch-up Failure: Comparative Productivity Growth in
the Hapsburg Empire, 1870-1910
Max-Stephan Schulze
WP101
Was Dick Whittington Taller Than Those He Left Behind?
Anthropometric Measures, Migration and the Quality of life in Early
Nineteenth Century London
Jane Humphries and Tim Leunig
WP102
The Evolution of Entertainment Consumption and the Emergence
of Cinema, 1890-1940
Gerben Bakker
WP103
Is Social Capital Persistent? Comparative Measurement in the
Nineteenth and Twentieth Centuries
Marta Felis Rota
WP104
Structural Change and the Growth Contribution of Services: How
Motion Pictures Industrialized US Spectator Entertainment
Gerben Bakker
WP105
The Jesuits as Knowledge Brokers Between Europe and China
(1582-1773): Shaping European Views of the Middle Kingdom
Ashley E. Millar
WP106
Regional Income Dispersion and Market Potential in the Late
Nineteenth Century Habsburg Empire
Max-Stephan Schulze
2008
WP107
‘The Big Problem of the Petty Coins’, and how it could be solved in
the late Middle Ages
Oliver Volckart